Cracking code on billion-dollar success

Pat Ryan, serial entrepreneur and founder of software company MAX Digital, and a member of the CNBC-YPO Chief Executive Network

1:00 PM ET Fri, 19 Sept 2014

CNBC.com

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What do founders of billion-dollar start-ups do differently?

I couldn't help but ask this question as I witnessed the recently reported $1 billion-plus IPOs/acquisitions of three Chicago companies whose founders I'd recently interviewed.

Each of these companies—GrubHub, Braintree and Fieldglass, as well as formerly public OpenTable—had great founding teams, and I wanted to see if I could find commonality across the group when it comes to success in business.

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Around the same time that I was starting to consider these patterns of success, I discovered an analysis of nearly 3,000 software and online services companies by McKinsey & Company called Grow Fast or Die Slow. It provided me with an interesting framework to apply to the success of billion-dollar Chicago companies.

McKinsey's findings focused on three factors:

Growth trumps all as a predictor of long-term success and is far more important than margin in both early stage and scaling start-ups.

Sustaining growth is extremely hard.

There is a repeatable recipe for sustained growth.

I set out to examine the Chicago founders' path to billion-dollar-plus valuations utilizing the core of McKinsey's framework for "supergrower" companies: market, monetization and rapid adoption. Below are three key points demonstrated by the Chicago billion-dollar club that test and illustrate each concept.

By initially tackling the market for restaurants that take reservations in major U.S. cities, OpenTable founder Chuck Templeton chose a market that has allowed it to already grow into a $1.64 billion market cap while exclusively domestic, though with further potential for growth internationally. OpenTable currently takes reservations in over 27,000 restaurants nationwide.

Matt Maloney and Mike Evans, co-founders of GrubHub—whose approach focuses on any restaurant that offers take-out or delivery—expanded on Opentable's market by a factor of 10. Their primary target market consists of nearly 350,000 independent restaurants. The power of a huge market is exemplified by Grubhub's hyper-growth: They only had $8.3 million in revenue in 2010 yet enjoy a $3 billion market cap today.

Fieldglass founder Jai Shekhawat identified the emerging trend of outsourcing in 1999 and created software to make it easy for large companies to manage the rapidly growing number of outside vendors. Fieldglass' excellent solutions rode the wave of outsourcing to a $220 million recapitalization in 2010 and a sale to SAP for a reported $1 billion this year.

Billion-dollar club factor #2: Define a monetization model that can capture demand without stifling it.

Our friends at GrubHub will tell you without any qualms that there is no consumer revenue model. This is because GrubHub's revenue comes from the restaurants that are happy to pay for the incremental business that GrubHub brings them. By making it free to the consumer and providing incremental business to restaurants, GrubHub has kept friction to a minimum while speeding up adoption and growth.

OkCupid and SparkNotes founder and current Match.com CEO Sam Yagan explained why there have been so few new players in the dating site world. As with other two-sided networks, dating sites experience the classic chicken-egg problem of needing scale on both sides to create liquidity.

To overcome this challenge, OkCupid began first as a personality testing site, a unique and creative approach to customer acquisition, in order to bring in users and build the supply side of the market. When they introduced dating, it was free of charge—and still is today. The large population of users, plus the free nature of the platform, has kept new competition at bay.

Billion-dollar club factor #3: Focus on rapid adoption.

The most notable example of rapid adoption was Bryan Johnson at Braintree. In 2011, Braintree brought in $9.9 million in revenue. Two years later the company was sold to PayPal for nearly $1 billion (including earn-out).

There were two things that Braintree did to achieve this skyrocketing growth:

First, they obsessed about making their platform extremely simple for e-commerce sites to use, achieving significant adoption in a short period of time.

Second, they were an early and effective innovator in mobile, courting mobile developers and becoming the favorite payments integration for mobile developers. As mobile commerce grew to command a larger share of spending, Braintree's revenues followed suit.

A billion for your thoughts

So what can we take away from all of this?

1. The three factors highlighted by McKinsey and the successful founders I have known give entrepreneurs the "what" to focus on and nail in order to build a world-changing company.

2. First-time entrepreneurs are at a real disadvantage in figuring out the "how" if they don't have a mentor who has already succeeded in doing so.

—By Pat Ryan, serial entrepreneur and founder of software company MAX Digital, and a member of the CNBC-YPO Chief Executive Network. For more from these Chicago-based billion-dollar success-story interviews, click here.

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